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Subjecting transfers of beneficial ownership to property transfer tax is not as simple as it might seem

The British Columbia Property Transfer Tax Act applies only to registered transfers of real property. In other words, it taxes transfers of legal ownership, but not transfers of beneficial ownership. For years, numerous British Columbia governments have considered expanding the scope of the act to include transfers of beneficial ownership – without substantive action.

However, significant real property-related tax changes are rumoured to be proposed in the upcoming provincial budget. Expansion of the Property Transfer Tax Act is not unthinkable, given that in 2016 British Columbia Premier John Horgan put forth a bill seeking to tax the disposition of a beneficial interest in land.

Proponents of such an expansion often cite the Ontario Land Transfer Tax Act, which taxes dispositions of beneficial ownership, as a model. Indeed, some components in Horgan's 2016 bill mirror those of the Land Transfer Tax Act. For example, the language imposing tax on transfers of a beneficial interest in the bill is identical to the language in Paragraphs 3(1)(a) and (b) of the act. Exclusions for leases and certain other transfers are also identical.

However, there are key differences between the Land Transfer Tax Act and the bill. One component missing from the bill, as well as from conversations surrounding legislative amendments to the Property Transfer Tax Act, is tax relief for transfers of beneficial interest in real property between affiliated corporations, which appears prominently in the Land Transfer Tax Act. The rationale behind the exemption is that the tax should not apply where beneficial ownership is retained in a single closely held corporate group and is merely transferred among its members.

The deferral and cancellation scheme in the Land Transfer Tax Act is intended to address this issue. Under the act, on transferring beneficial interest, the transferee may apply to have the tax deferred. Although the tax is deferred, the transferee must post security. Then, provided that certain conditions are met (eg, the transferee and transferor remain affiliates), the tax is cancelled after three years, rendering the transfer between the affiliates exempt.

Any amendment to the Property Transfer Tax Act that would tax transfers of beneficial ownership should not be made haphazardly. Such an amendment must be joined by, among other things, a mechanism to relieve the tax where the beneficial ownership is transferred to an affiliate.

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